2010 (12) TMI 1062 - SC - Companies Law

Offenses by companies - In the absence of any prescribed and validated method of analysis under section 23(1A)(hh) of the Prevention of Food Adulteration Act 1954 (hereinafter referred to as the 1954 Act ) could a prosecution have been launched against the appellants based on a report submitted by the public analyst using the method of the Directorate General of Health Services (D.G. H. S.)? Could a prosecution have been launched against the appellants in the absence of any validated method of analysis to ascertain the percentage of pesticide residue present in a carbonated beverage which renders the report of the public analyst unreliable particularly when it does not indicate that such percentage of the pesticide residue is injurious to health and therefore adulterated within the meaning of section 2(ia)(h) of the aforesaid Act? What is the effect of non-specification of the level of tolerance in respect of the presence of pesticide residue in sweetened carbonated water in the Table appended to rule 65(2) of the Prevention of Food Adulteration Rules 1955 (hereinafter referred to as the 1955 Rules )? What is the liability of the directors of a company which is said to have committed defaults within the meaning of section 17 of the 1954 Act in the light of the decision of this court in S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla 2005 (9) TMI 304 - SUPREME COURT OF INDIA when they were neither in charge of nor responsible for the conduct of the business of the company?

Issues Involved:
1. Validity of prosecution based on the method of analysis under section 23(1A)(hh) of the Prevention of Food Adulteration Act, 1954.
2. Reliability of the public analyst's report in the absence of a validated method of analysis for pesticide residue in carbonated beverages.
3. Effect of non-specification of tolerance levels for pesticide residue in carbonated water under rule 65(2) of the Prevention of Food Adulteration Rules, 1955.
4. Liability of company directors under section 17 of the 1954 Act when not responsible for the conduct of the business.

Detailed Analysis:

Issue 1: Validity of Prosecution Based on Method of Analysis
The appellants contended that the prosecution was invalid as the public analyst used the Directorate General of Health Services (DGHS) method, which was not a prescribed and validated method under section 23(1A)(hh) of the 1954 Act. The Supreme Court found that the absence of a validated method of analysis and specific laboratories for testing pesticide residues in carbonated beverages was significant. The court disagreed with the High Court's view that the non-formulation of rules under section 23(1A)(hh) was not fatal to the prosecution. The Supreme Court held that the use of non-prescribed methods could lead to arbitrary prosecutions, which is unacceptable.

Issue 2: Reliability of Public Analyst's Report
The appellants argued that the public analyst's report was unreliable due to the absence of a validated method of analysis to ascertain pesticide residue percentages. The Supreme Court noted that the public analyst detected 0.001 mg/litre of Carbofuran using the DGHS method, but no validated method existed at the time. The court emphasized that without a validated method, the report could not be deemed reliable for prosecution. The court also observed that the mere presence of pesticide residue does not automatically render the product adulterated unless it exceeds prescribed tolerance limits.

Issue 3: Effect of Non-Specification of Tolerance Levels
The appellants highlighted that at the relevant time, no tolerance limits for pesticide residue in carbonated water were specified under rule 65(2) of the 1955 Rules. The Supreme Court found that the absence of specified tolerance levels meant that the presence of any pesticide residue could not be considered adulteration. The court noted that tolerance limits for pesticide residue in carbonated water were prescribed only from June 17, 2009, and the detected level of 0.001 mg/litre was within these limits. Thus, the product could not be deemed adulterated based on the standards applicable at the time of the analysis.

Issue 4: Liability of Company Directors
The appellants argued that the directors could not be held liable as they were neither in charge of nor responsible for the conduct of the company's business. The Supreme Court referred to section 17 of the 1954 Act and the decision in S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla, which requires specific allegations against directors regarding their role in the company's management. The court found that the complaint did not provide specific allegations against the directors. Additionally, the company had nominated Somesh Dahale under section 17(2) as the person responsible for the conduct of its business. Therefore, the directors could not be held liable.

Conclusion:
The Supreme Court allowed the appeals, set aside the High Court's judgment, and quashed the prosecutions against the appellants. The court emphasized the importance of having validated methods of analysis and specified tolerance limits for pesticide residues to ensure fair and reliable prosecutions under the Prevention of Food Adulteration Act, 1954.

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